Growth Opportunities, Diversification And Firm Value

Diversification and firm value has been one of the most active research areas in corporate finance in recent years. Foreign research shows that there is a diversification discount in developed countries. But recently, the research on emerging markets has different conclusions. This paper studies the relationship between diversification and firm value by considering the impact of growth opportunities. Growth opportunities are important factors for diversified, who have strong endogenous with diversification. This paper measures growth opportunities using asset growth rate, the position of firm sales in industry and industry life cycle. Using these methods can remove the endogenous of growth opportunities. Meanwhile, this paper uses Heckman's two-stage procedure to control the self-selection of firms that diversify. Using a sample of 789 Chinese listed companies during 2000-2006, this paper finds:first, there is a significant valuation premium in diversified firms even controlled for the difference in growth opportunities; second, high value firms are more likely to adopt diversification strategy; third, low growth opportunities firms are more likely to adopt diversification strategy.